AliBaba’s Business Model – End of the Old Business-Consumer Model?

For most of us, in the West certainly, when thinking of an online marketplace the names Amazon and eBay leap to mind.

But there is another e-commerce giant poised to take on the global online marketplace.

That is Chinese e-commerce giant AliBaba.

The AliBaba Group accounts for 80% of all online retail sales in China.

As of 2015 the company has 350 million active users, larger than the entire population of the United States.
Alibaba recorded $9.3 billion worth of orders in just one day in November 2014, during the holiday known as “Singles Day.”

The story of AliBaba features one of the most successful business models in the world and one that is very different from the accepted business/consumer model that we have grown familiar with.

In this article we take a look at Alibaba’s story, business model and consider some of the implications of this model for online global e-commerce in the years ahead.

What is Alibaba?

The Alibaba Group was started in 1999 by Jack Ma along with 17 other co-founders with the website Alibaba.com.

Alibaba is business-to-business web portal that connects Chinese manufacturers with international buyers.

Ali Baba is a character from Persian literature. In the story One Thousand and One Nights According to Jack: People from India, Germany, Tokyo and China all knew about Alibaba. Alibaba is a kind, smart business person, and he helped the village.

Alibaba Group is one of the biggest companies in China today. It provides consumer-to-consumer, business-to-consumer and business-to-business sales and other services via e-commerce web as well as offline portals.

Alibaba Business Model

The platform caters to suppliers who sell their products in bulk at wholesale prices to small or medium-sized businesses worldwide.

The smaller businesses then resell them for a profit in their domestic markets.

Alibaba’s Business model is made up of three major e-commerce portals: Alibaba.com, Taobao, and Tmall.

All of them serve to connect various types of buyers and sellers.

Alibaba functions as a middleman.

Within this model there are 6 additional subsidiaries including Aliexpress, 1688, Alimama, Alibaba Cloud, Ant Financial, and Cainiao Network.

Together they make the Alibaba group a big ecosystem.

How Does Alibaba Make Money?

Alibaba.com

Alibaba.com provide the e-commerce platform through which exporters in China and worldwide can connect with buyers in over 2300 countries.

The exporters, or sellers, are able to use and list up products on the platform and begin selling immediately.

Free Supplier Membership

With a Free Membership sellers can list up to 50 items Free of Charge.

Alibaba charges a percentage of each sale if the money when payments are made via Ali Pay and the seller is from mainland China, Hong Kong & Taiwan

Premium Gold Supplier Membership

With Premium Membership Sellers, along with listing more items are verified (better for consumer confidence) and can benefit from greater product exposure.

It is a prerequisite that suppliers from China must purchase a premium gold membership plan to begin trading on Alibaba.com.

All Gold suppliers are required to undertake a rigorous authentication process including verification from a number of payment processors.

Along with the membership fee, Alibaba charge product commissions as a percentage of the transaction value of the goods sold.

Taobao

Taobao means “search for treasure” in Chinese.

Launched in 2003, this part of Alibaba’s business model facilitates (small) business to consumer and consumer to consumer trade by allowing small businesses and individual entrepreneurs to list their products on their website.

Taobao is the largest of all the sites in the Alibaba group and is China’s largets e-commerce site.

In fact, it is so popular that it forced the market leader of the online marketplaces – eBay to close its Chinese operations in 2006.

Taobao is ranked the ninth most popular website in the world by Alexa.com and as well as listing hundreds of millions of products from millions of sellers is has 400 million active users.

There is no fee to begin trading in Taobao.

Instead merchants bid on specific keywords to help advertise their products.

In this respect Taobao functions rather like Google Adwords.

Other functions include a special rating system that reflects how many transactions each seller has successfully completed. Buyers can communicate with merchants directly through Alibaba Group’s instant messenger software.

Tmall

Tmall (short for Taobao Mall) is another e-commerce portal that caters for the fast growing chinese middle class.

Unlike Taobao which is focused on small sellers and single entrepreneurs, Tmall works with larger forms such as Mike and Apple.

At present Tmall boasts over 500 million users. Its business model functions in a more “traditional” way like familiar e-commerce websites such as Amazon and eBay.

Commissions are taken as a percentage of the price for every item sold. In addition service fees and charges for marketing services are applied to suppliers.

Alimama

Alimama is a platform where both publishers and advertisers can make purchases from content based PPC advertising, banner or text links and contextual advertising.

It is the largest open marketing platform in China and functions like Adsense.

Publishers and content marketers can make money from Alimama by placing advertisements in their content.

Revenue is made through advertisers and shared with affiliate partners.

AliExpress

AliExpress is a global market place for retail foods whereby Chinese distributors can sell directly to consumers around the world.

Aliexpress, like many typical commerce platforms makes money by charging commissions as a percentage of the transaction value of items sold.

AliExpress charges 5-8% commission on the value of each transactions. There is an additional fixed $1500 plus store fee to begin using a store on the platform. This is designed to safeguard against counterfeit goods suppliers and bad suppliers from re-opening an account after receiving negative user reviews.

Alipay

Alipay is Alibaba group’s third party payment processor that assist buyers carry out their online transactions. It functions in the same way as an ewallet and permits users to hold funds securely and carry out transactions online fast and securely.

There are two ways for a shopper to make a payment using AliPay:

The default option is for the shopper to use their mobile device (phone, tablet, and so on) to scan the QR code that appears on the Alipay payment page. This is the most popular payment method, used by the majority of shoppers.

An alternative is for the shopper to log in to the Alipay payment page using their Alipay credentials.

How does AliPay make money?

It doesn’t charge any fee and works through an escrow service. That is, it invests the stored money in a partner bank at a predetermined rate and receives interest on the stored amount.

1688

1688.com was launched by Alibaba in 2010 primarily for targeting the wholesale business segment within China. The company reportedly hosts more than 500,000 quality suppliers offering over 150 million different types of products. 1688.com caters to individuals and businesses from all around the world and is today the number one website when looking for wholesalers and suppliers in China. Even many Taobao stores get their supplies from 1688.

Since 1688.com was established as a wholesale marketplace to cater users from China, the prices on the website are very low which attract a lot of customers all over the world.

Alibaba Cloud

Alibaba Cloud began as a private cloud to serve the internal demands of Alibaba’s e-commerce businesses. It is a global cloud computing company that provides various cloud computing services: elastic computing, object storage, relational database, big data analysis, and artificial intelligence. It operates in eight geographical regions around the globe.

Ant Financial

Ant Financial is the most valuable fin-tech company in the world that brings inclusive financial services to the world. The company operates Alipay, the world’s largest mobile and online payments platform, Yu’e Bao, the world’s largest money-market fund, Ant Fortune, Zhima Credit and MYbank.

Cainiao Network

Cainiao Network is a Logistics data platform operator dedicated to meeting the current and future logistics demands of China’s online and mobile commerce sector. The company has taken a collaborative approach to logistics and aims to realize delivery anywhere in China within 24 hours, and across the globe within 72 hours.

Other businesses

Alibaba is also involved/have stakes in other businesses. Some of them are:

Sina Weibo: China’s version of Twitter,

Youku Tudou: similar to YouTube,

Aliwangwang: an instant messaging service,

Juhuasuan: sales and marketing platform for flash sales for Taobao and Tmall.

Laiwang: a messaging application competing with WeChat.

To conclude

Alibaba is famous for its B2B website, Alibaba.com, that facilitates international trade in China and a few other Asian countries. However, it is not the sole reason for Alibaba’s success. It is really in the game because of its e-commerce within China: Taobao and Tmall. Sales on the Taobao marketplaces make up more than 80% of all online purchases in China. That’s huge.